EMERGING MARKET LENDING: IS MORAL HAZARD ENDOGENOUS?

Tobias Broer

Journal of Economic Development, 2007, vol. 32, issue 2, 41-67

Abstract: This paper shows how growth in financially open developing countries is affected when relations with international lenders suffer from the danger of moral hazard. We find that if entrepreneurs can gamble with foreign creditors¡¯ money, borrowing under standard debt contracts is constrained by a No-Gambling Condition similar to that in Hellmann, Murdock, and Stiglitz (2000). However, this incentive constraint is endogenous in the development process: growth increases entrepreneurs¡¯ own capital at risk and thus reduces incentives to gamble. But capital accumulation also decreases the profitability of investment, which has the opposite effect. General equilibrium under moral hazard shows a unique and stable steady state, but involves at least temporary rationing of profitable projects and possibly positive net investment by developing countries in international financial markets.

Keywords: Moral Hazard; Asymmetric Information; Open Economy Growth; International Finance (search for similar items in EconPapers)
JEL-codes: D82 F43 O16 (search for similar items in EconPapers)
Date: 2007
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Emerging Market Lending: Is Moral Hazard Endogenous? (2004)
Working Paper: Emerging Market Lending: Is Moral Hazard Endogenous? (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:jed:journl:v:32:y:2007:i:2:p:41-67

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